Bolder action is needed to exert monetary control

via CAAI

Monday, 20 September 2010 15:00 Steve Finch

THE National Bank of Cambodia’s announcement last Thursday that it plans to crack down on illegal money changers represents an important – if minor – step on the road to better control of the riel after a turbulent few months of currency depreciation earlier this year. But there is still a very long way to go.

Of the 3,249 money changers recognised by the NBC, only 795 were registered with the central bank last year. The vast majority remained outside of government control. Of these, the most were in the provinces – some 2,859 – where exchange rates can vary dramatically depending on proximity to Cambodia’s borders and therefore the influence of foreign currencies.

The key for the Kingdom remains to try to standardise the rate against the dollar, baht and dong in particular and to generate greater power to control monetary policy at the central bank. Ultimately, the United States Federal Reserve still dictates Cambodia’s currency valuation to a large extent, given that 90 percent of money supply remains in dollars.

Exerting greater control of money changers, a step taken by Vietnam, which has made some inroads towards dedollarisation, is therefore a key step. But as the Asian Development Bank pointed out in July in its latest report on Cambodia’s progress towards greater use of the riel, Cambodia has to design a firm blueprint regarding its policy. At the moment that doesn’t seem to exist.

At the launch of the ADB report, Ministry of Economy and Finance Secretary General Hang Chuon Naron did not divulge the direction the government would take in a bid to exert greater control of the riel, despite numerous questions on the issue, a worrying sign there is still not a clear path towards dedollarisation.

That is understandable in many ways. An overly heavy-handed approach, such as that taken in Vietnam, can often be counterproductive. The dong dropped more than 5 percent in value against the greenback last year and has struggled again in 2010. But where does the riel go from here?

ADB dedollarisation specialist Jayant Menon has suggested the government has to begin using more sophisticated monetary tools than just the large dollar sell-offs we have seen this year – the use of government bonds and securities would be a good start.

Without control of the value of the riel and interest rates Cambodia will only continue to find itself powerless when the dollar strengthens substantially or when the banking sector is reduced to infighting, as was the case with Campu Bank’s decision to raise its loan rate last week.

An overnight central bank borrowing rate would normally address these problems as banks would have to operate within the realities of the internal interest rate climate and not according to policies directed by banking headquarters overseas. Unfortunately for NBC and the Ministry of Economy these headaches are complex and closely intertwined.

First steps are difficult to take, but at least the issue of money changers reflects a desire to take action. Nevertheless, if the central bank is ever going to exert real authority in the financial sector it will have to become a lot bolder.